Kim Hin reported a 2018 headline net loss of RM59m, mainly attributable to impairment of assets amounted to RM28m. Revenue remain subdued, down 4% yoy given challenging tile market. Excluding one-off items, its 2018 core net loss of RM22m was below the market and our loss forecasts. Given the stiff price competition, higher operating costs and sluggish property market, we believe losses will continue in 2019E, before it recovers in 2020E. We tweak our 2019E loss forecast by 1%, while we cut our 2020E EPS by 47%. Maintain our SELL call with a lower TP of RM1.10, based on 2019E Price/book of 0.35x.

Headline Net Loss of RM59m

Kim Hin incurred a net loss of RM59m in 2018 compared to a net profit of RM9m in 2017, partly due to impairment of assets amounting to RM28m for its Seremban and Kuching factory, coupled with RM4m write-down of inventories. Its 2018 revenue was down 4% yoy to RM403m, while operating costs were up 4.8% yoy due to lower capacity utilisation and higher raw material and energy prices. Accordingly, EBITDA margin contracted to 2% compared to 10% in 2017. Excluding one-off items, its 2018 core net loss of RM22m is below market and our loss forecasts of RM26m and RM27m, respectively.

Cut Our 2020E EPS by 47%

While we maintain our loss forecasts for 2019E, we expect the recovery in 2020E to be not as strong as we have expected previously. Operating costs remain high on the back of higher raw material and energy prices. Meanwhile, stiff domestic price competition continued within the tile industry due to soft demand for tiles from the prolonged weak property market, which is plagued by high overhang and affordability issues. As such, we cut our 2020E EPS by 47% and introduce our 2021E forecast showing a weak earnings recovery.

Maintain HOLD With An Unchanged TP of RM1.10

We reiterate our SELL call with a lower TP of RM1.10 based on a 2019E Price/book of 0.35x. We believe the sector outlook remains challenging given the continued weak property market and stiff price competition. Having said that, we believe its net cash of RM31m or RM0.21/share will support the company to weather the current industry downturn.

Source: Affin Hwang Research - 1 Mar 2019